Regulatory Perspectives on Diversity and Inclusion
Diversity and inclusion (D&I) have risen to the top of the corporate agenda, driven by customers, shareholders and employees who want to see their concerns for the fair treatment of all individuals put into action. The Bank of England, PRA and FCA’s joint discussion paper clearly marked D&I as a priority issue for the financial services sector and invited firms to contribute their views on how they should be embedded into business practices. The discussion paper provides an insight on the lenses through which key UK regulators view diversity, and how their mandates and objectives interact with a diverse and inclusive financial market. It aims to consciously stimulate discussion to generate a better consultation paper and, ultimately, more impactful policy.
When we think of ‘diversity’, it’s easy to stop at the relatively simple level of the characteristics that were defined under the Equality Act 2010 and which form the basis of many of the statutory protections we see in everyday business. However, UK regulators are now going further, recognising that diversity can cut across multiple characteristics and demographics. People often have multiple diverse characteristics which contribute to their thoughts and opinions, and it is important to make sure that all of these are considered.
So, why is it so important that everyone’s voice is heard?
There’s the principle of fairness, of course. Discrimination has no place in our society. However, the report also highlights the reality that diverse perspectives can play an important role in ensuring the stability and economic wellbeing of the financial sector, and that a uniform and exclusive financial market is unlikely to offer the competition and responsible stewardship expected of it. From a conduct perspective, the link between culture and D&I must not be ignored – D&I is one of the mechanisms through which the FCA will assess culture and the lever it will use to drive improvement.
From a risk management perspective, board and senior leadership teams that include a range of perspectives might challenge entrenched practices more robustly, and having a greater variety of skills and experiences at a senior level will increase the quality of discussion and debate. The paper references a study which found that boards with greater female representation were less likely to receive misconduct fines, indicating that not only are outcomes better for firms, but better for customers too. However, to be effective, firms need to recognise that D&I must be embedded at all levels (and in all departments) of a firm – not just at board level.
Customers can benefit in other ways too. A retail firm which has a range of voices and experiences at key decision-making levels is likely to empathise with and understand the needs of a diverse customer base more effectively. It is possible that the needs of customers will be missed or not considered at all when there isn’t anyone in the business who truly understands what those needs are.
There is a third way in which diverse and inclusive practices can help to meet regulatory objectives: competition. Without diverse input, the range of products and services risks failing to respond to what the market and customers really need. Opportunities for growth exist, now and in the future, but without the ability to identify, develop and deliver them the market just won’t evolve as it could and should and firms will lose business. Whether it is making retail products friendlier to families which don’t fit the traditional nuclear mould or developing trustworthy and transparent green investments, there is scope for firms to lead the way into the future of finance by embedding diversity and inclusion into their product governance frameworks.
The FCA reinforced its view of culture and purpose as a ‘key priority’ in a speech on 22 September 2021, noting that the ‘new normal’ introduced by the COVID-19 pandemic must be a landscape of inclusion and that increasingly firms should expect to be challenged on their ESG strategy.
Where does this leave firms? The proposed initiatives are wide reaching, and while some of them may feel challenging to achieve, there are plenty which firms may already be doing, even without realising. Others may require action right now and some may even overlap or interact with a firm’s agenda on other social issues, such as supporting leadership on Black Lives Matters, or women’s pay gap reporting. Whatever stage firms are at though, the message is clear – diversity and inclusion will form a key aspect of regulatory considerations going forward.
A pilot survey is expected in the autumn of 2021, aimed at understanding the current state of play of information on diversity and inclusivity in the financial services sector. Firms will only be expected to provide information that they already have and will not need to seek more at this stage. However, that will come later, and they should start preparing. When communicating this message to employees, firms must set the tone and inspire trust. Personal data, relating to race, religion and sexual and gender identity might not be something that employees have shared with their colleagues. For the data to be meaningful and usable, it must be as accurate as possible, but firms cannot compromise the privacy of their employees.
Some firms are already required to report information such as gender pay gap percentages or how management’s strategy avoids discrimination, but the report recognises that the current requirements don’t inspire market and consumer confidence and can appear to be no more than ‘box-ticking’ exercises. It suggests that firms should be required to report further qualitative or quantitative information on the diversity of their employees. If this becomes a requirement, there will be a need for assurance over the quality of information, from internal or external audit functions. By putting in place strong governance structures over data and its disclosure, firms can help build stakeholder confidence that they are doing the right thing and embedding a diverse array of perspectives into their business practices.
There are many ways of monitoring diversity and inclusion, but the regulators suggest that it should be more proactive and real-time, rather than limited to reporting publicly at static points in time. They propose developing metrics that could help link remuneration to diversity and inclusion targets, enabling rewards to take into account the effort made by boards and management in achieving these goals. Senior Management Function (SMF) roles could even include a requirement for firms to evidence how they have embedded consideration of the need for diverse and inclusive hiring practices before they receive regulatory approval.
